The new BRICS bank, officially called the New Development Bank (NDB, to be
headquartered in Shanghai and first to be run by an Indian), has been launched
at the sixth summit of the BRICS countries, held in Brazil in July 2014. I hear
that it is making relatively slow process. So China has been pursuing recently
the creation of yet another multilateral development bank (China-led), the Asian Infrastructure Investment Bank
(AIIB), with registered capital planned at $100bn initially double the size of
the BRICS bank. By end October 2014, 21 Asian countries – including India – had
signed the Memorandum of Understanding on Establishing AIIB. AIIB will be
formally established by the end of 2015 and headquartered in Beijing.
The establishment of BRICS-led multilateral
development banks (such as the BRICS bank or the AIIB) will be beneficial for
global development to the extent that it helps close infrastructure financing
gaps and that it helps rebalance representation of the non-OECD countries on
the multilateral scene that remains very much US-scripted. The new banks may
even speed up ´voice reform´ in the Bretton-Woods institutions – so far
effectively hindered despite all rhetoric by the West[1].
However, their very existence makes that reform now less important than in the
past when the established MDBs (World Bank, ADB, AfDB, IDB) were the only
important sources of infrastructure finance for many poor countries.
In a broader setting, the establishment of
multilateral development banks outside the established Bretton-Woods system can
be viewed as China´s shadow global
diplomacy[2] that
aims at undermining US-led governance structures established after WWII. Competition
is building for the existing Bretton-Woods system.
So it does not come as a surprise that the US
lobbying against those banks.[3] Jane
Perlez (2014) cites a senior Obama administration official: the Treasury
Department had concluded that the new bank (here the AIIB) would fail to meet
environmental standards, procurement requirements and other safeguards adopted
by the World Bank and the ADB, including protections intended to prevent the
forced removal of vulnerable populations from their lands. By contrast, the ADB
has become so encumbered with restrictions that it now takes up to seven years
on average for a project to go from proposal to approval to completion, the
official said. Consequently, a shift of multilateral lending toward would not
only speed up ´voice reform´ but also the financing and building of infrastructure,
possibly (not necessarily) at costs for the environment and habitats.
Another concern,
not publicly discussed yet to my knowledge, is that the establishment of
alternative source of multilateral funding will act to weaken the enforcement mechanism of the existing
MDBs. They might as well lose their preferred
creditor status[4].
Willem Buiter and Steven Fries (2002) had discussed this after the EBRD had
been created: A basic mechanism for fostering compliance with the terms and
conditions of MDB loans to the public sector involves the dynamic incentives
that arise from the repeated interaction between borrowing governments and the
MDBs[5].
The potential for repeated loans, together with the credible threat to cut off
future lending when terms and conditions are not met, can be exploited to help
ensure borrower compliance. The incentive mechanism arising from repeated
interactions is more effective when borrowers face limited access to alternative
sources of financing. Therefore, it must indeed be envisaged that the incentive
for borrowing countries to comply with the terms and conditions of, say, IDA
loans will diminish as the end of the lending relationship nears and is
replaced by loans from the AIIB or the BRICS bank.
[1] Vestergaard, J. and R.
H. Wade (2013), “Protecting Power: How Western States Retain the Dominant Voice
in The World Bank’s Governance”, World
Development, Volume 46, June, pp. 153-164.
[2] Rudolf,
M., M. Huotari und J. Buckow (2014), „Chinas Schatten-Außenpolitik:
Parallelstrukturen fordern die internationale Ordnung heraus“, MERICS China
Monitor No. 19, Berlin, 23. September.
[3] Jane
Perlez (2014), „U.S.
Opposing China’s Answer to World Bank”, The New York Times, 9th October.
[4] The term means that the obligations
to MDBs by both sovereign borrowers and private entities have a priority claim
and treated as senior to those of bilateral and commercial creditors.
[5] Buiter, W. and S. Fries (2002), „What Should the
Multilateral Development Banks Do?”, EBRD Working Paper No. 74, European Bank
for Reconstruction and Development, London, June.